The China Question
Where is the China-U.S. relationship heading, and how should Western ceramic companies hedge their bets in China?
Finally, after a year of negotiations, Presidents Trump and Xi have at least worked out the easy stuff on the Sino-U.S. tariff war, as China has agreed to buy more American goods and allow foreign companies more access to its domestic market. Both countries have agreed to extend the deadline to solve the tougher structural issues like forced intellectual property (IP) transfer and enforcement, currency manipulation, and the artificial propping-up of state-owned enterprises.
Unfortunately, these are the big issues that companies in the ceramic industry worry about. Questions remain, including: “Should we still invest in China? Will we finally have IP protection in China? Will our China product and equipment costs go up?”
Let’s take a look into my crystal ball and make some predictions on the where the China-U.S. relationship is heading and how Western ceramic companies should hedge their bets in China.
In the Short Term
China will continue to appease Trump in the form of purchasing more U.S. soybeans, cars, crude oil, semiconductors and liquid nitration. We’ll see some loosening-up on several of China’s industries like automotive, credit card, banking and insurance.
For example, China has allowed both Tesla and American Express to operate in China—as a fully independent subsidiary and as a majority-owned joint venture, respectively. At first glance, these sound like substantial gift offerings. In reality, however, these are nothing more than a cheap gimmick, because both the auto and credit card industries are already dominated by Chinese companies that don’t fear any new foreign players.
China’s premiere credit card company, Union Pay, has over 90% market share in China; it won’t sweat when American Express comes in. China knows that these brand names create headlines, making Trump look good and appear to be the winner in the trade war. In the coming months, we’ll see Beijing grant operating licenses to more big names like PayPal, Visa and MasterCard.
Will the U.S. and China ever resolve the tougher, structural reforms that affect the ceramic industry? Can a foreign semiconductor packaging company operate in China without fear of its IP being stolen? Will China stop subsidizing and favoring home-grown ceramic companies? Unfortunately, the answer is no.
Trump, in his quest for political wins ahead of the 2020 presidential election, will gladly accept the promises of increased exports, declare victory and defer the bigger issues to a later date. The China problems will officially be closed. And China, once more, will be off the hook while waiting and hoping that Trump doesn’t win re-election so it can go back to the “same old, same old” ways of doing business.
Trump caught China at the right time. Its economy has slowed, unemployment has risen and consumer spending has softened, forcing President Xi to give in to Trump’s demands. However, this appeasement won’t last. Ever since China was colonized by Western countries in the 19th century, its leaders have vowed to never again kowtow to “foreign devils.” The payback is coming.
U.S. Secretary of State Wilbur Ross said in an interview in 2018 that China was “running out of bullets,” meaning that it could only tax $100 billion worth of U.S. imports vs. the over $500 billion the U.S. buys from China—thereby giving Trump $400 billion more in bullets to play with. However, Ross forgot how entrenched and embedded American companies are in China.
Take Starbucks as an example. China is Starbucks’ second-largest market after the U.S., with over 3,000 stores; that number is expected to double by 2023. Similarly, KFC, Nike, Coca-Cola, Kimberly-Clark and Disney all have sizeable revenue streams coming from China. When you add industrial brands—Caterpillar, John Deere, Boeing, Ford and General Electric—into the mix, the U.S. interests in China may be well in the hundreds of billions of dollars. Sorry, Wilbur; China has way more ammo than the U.S.
China can retaliate in many ways, but most of it will come in the form of what I term bureaucratic harassment. One of my clients, a Maine lobster fisherman, lost a $20,000 shipment when Chinese customs “accidentally” left the high-priced cargo to sit outside on a sweltering August day in Shanghai. The fisherman lamented, “This is a first for me in over 10 years of working with the Chinese. I don’t know what to call it. An accident? Revenge for Trump?”
This type of harassment won’t stop until Trump is out of office and a more conventional and predicable president steps in. We’ll see hundreds of Starbucks, McDonald’s, and Walmart stores closed for “health-related” reasons. Some U.S. Fortune 1000 executives may unexpectedly be detained for a few weeks on their next China business trip. Your ceramic products and materials headed to China may be lost or delayed in Chinese customs. Whatever the form, the harassment will be a show of force and a warning to the world that China is not to be taken lightly.
Huawei’s Effect on the Ceramic Industry
China claims that the U.S. is on an all-out smear campaign against Huawei, the world’s biggest supplier of telecommunications equipment and 5G networks. It’s rumored that Trump may soon sign an executive order banning all U.S. companies from using Huawei telecommunications equipment. This move is on top of his directive that no U.S. agency should use Huawei and the recent order to arrest Meng Wanzhou, the company’s chief financial officer, for allegedly violating U.S. sanctions on Iran.
Trump routinely abuses Huawei in public, claiming that the company is nothing more than a spy machine for the Chinese government. But is Trump going too far when he demands that other countries—the UK, Germany, Poland, India and the Czech Republic—restrict Huawei’s participation in their next-generation 5G networks? China certainly thinks so.
Huawei is China’s high-tech darling. Besides possibly Alibaba, Huawei is the most famous Chinese company in the world and is its torch bearer, representing innovation, entrepreneurship, and all the goodwill that Chinese communism has to offer. Of all the things that Trump has done and said against China, a potential worldwide ban of Huawei would be considered the most egregious in President Xi’s eyes.
Xi sees Trump’s actions as a blatant discriminatory act against a privately owned company that is just trying to offer good products at good prices. China will retaliate strongly if Trump’s rhetoric continues—and worse, if he succeeds in convincing other countries not to use Huawei. This outcome could adversely affect the ceramic industry.
How so? In a tit-for-tat strategy, China could ban Chinese firms, consumers and universities from using U.S. technologies. For example, Comac, China’s state-owned enterprise responsible for developing the country’s first commercial aircraft, could be prohibited from using U.S.-made composite materials or ceramics in its fuselage design, brakes, seals, glass windshields, or LED displays. This could apply to many industries—semiconductor, construction, household appliances and automotive—that rely heavily on foreign ceramic components and technologies.
Still Worth Investing in China?
I just detailed a lot of seeming doom and gloom for foreign companies in China. But let’s take a step back and put everything in context. Remember the Tiananmen Square riots in 1989, when Chinese paramilitary police killed Chinese students who were protesting against China’s Communist party? Soon after, hundreds of foreign companies bailed out of China, and political pundits declared that China would go back to the dark days of the Cultural Revolution. Fast-forward to today; the companies that toughed it out are doing better than ever, selling to a middle-class population of 400 million with a booming economy growing at over 6%.
Similarly, the Sino-U.S. tariff war and aftermath are only short-term blips that will, like Trump’s presidency, come and go. Remember, China has always been a long-term play, not a place to make a quick buck and run. Companies must be in China for the long haul. However, this doesn’t mean that you blindly stick with your original strategy. The country is constantly changing, so make tweaks here and there to match the geopolitical and economic climates.
As an example, this tariff war—along with some of China’s new economic initiatives—is changing the dynamics surrounding why foreign companies should go to China. Twenty years ago, we went to China to outsource. Ten years ago, we went to China to sell to its 1.3 billion consumers. In the next five years, China will serve as the entry point to sell to the other half of the world as it commences its One Belt, One Road initiative, building highways, ports, rail lines, and other infrastructure to economically link over 70 countries throughout Africa, the Middle East, Asia, and Eastern Europe.
This new, modernized Silk Road will connect China to all of Africa and Eastern Europe, the Middle East, and a mixed bag of countries in South America and Asia. This new sphere of influence will encompass 65% of the world’s population and 35% of the world’s GDP. Who would have thought that your China operations would someday be selling to Indonesia, Pakistan or Rwanda?
Chinese media outlets are continually asking its citizens, “Why should we buy American products and brands if Trump and Americans disdain us so much?” I have already witnessed the effects of anti-U.S. sentiment. For example, when I interviewed Chinese consumers outside a Starbucks in Beijing, one businessman told me, “I’m not going to spend my money on an American company that doesn’t like me or says bad things about my country! I’ll buy a cup of coffee from a local Chinese shop.”
But this anti-U.S. sentiment is all the more reason for foreign companies to be in China. They need to manufacture locally in China, develop new products locally, hire local employees, have a local Chinese brand name, and ultimately look and feel like a Chinese company. Exporting to China or finding a distributor isn’t enough anymore. To do business in China, one must be fully embedded and engaged in China. As one Fortune 100 C-level executive told me, “We are totally rethinking China. We can’t just serve China from abroad. It needs its own headquarters.”
Ceramics and Intellectual Property
Though I don’t expect China to make any of the Trump-requested structural changes in the immediate future, it should implement some reforms that will benefit the ceramic industry. For one, there are rumors that China may allow foreign companies to operate domestically as wholly owned foreign subsidiaries. This would be available to certain key supporting industries such as ceramics, software, and robotics that are supplying China’s original equipment manufacturers’ (OEMs) businesses in the auto, aviation, and medical industries.
In the race to be first to market, many Chinese OEMs are actually foregoing the traditional “forced IP transfer” request and purchasing foreign technologies, components, and services on an ad hoc basis. These new profit-driven Chinese firms realize that much time is wasted squabbling over the IP, which delays the development, production and introduction of their products.
To enhance China’s Made in China 2025 initiative, which is a plan to develop homegrown manufacturing technologies, many of China’s science and industrial parks will offer tax incentives and low rents and utilities to ceramic companies in exchange for setting up development and manufacturing facilities. Many municipalities are doing this to spur entrepreneurship, create jobs and increase tax income.
Opportunities on the Horizon
The ceramic industry, in particular, will have many opportunities in China as the country embarks on its Made in China 2025 and One Belt, One Road initiatives. In addition, ceramics could be one of the first industries to take advantage of the economic reforms that China must make to attract more industries to support its OEMs.
There will be some hiccups along the way, but don’t let them affect longer-term expectations. Plan accordingly: Look for your company to “act and feel” more Chinese, increase your manufacturing presence in China, and prepare to sell to a new and emerging regional trading zone led by China.
Stanley Chao serves as managing director of All In Consulting, a Los Angeles-based consulting firm that assists Western companies in their Asia and China business developments. Author of Selling to China: A Guide for Small and Medium-Sized Businesses, he can be reached at email@example.com.
Any views or opinions expressed in this column are those of the author and do not represent those of Ceramic Industry, its staff, Editorial Advisory Board or BNP Media.